Are Adjustable Rate Mortgages A Good Alternative For Home Buyers

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During the last six to nine months, real estate markets through out the country have seen some dramatic changes. Even in formerly hot housing markets, home prices have settled down, or even begun to fall. That's great news for most home buyers, creating a buyer's market.

Unfortunately, even with lower prices and less competition for homes, some buyers are having a hard time finding a home they can easily afford. Too often, big home prices mean big mortgage payments. It can turn some home buyers completely off of purchasing a home.

There are lots of ways to get around not being able to afford a traditional mortgage program, one of which is an Adjustable Rate Mortgage, usually referred to as an ARM. What exactly is an adjustable rate mortgage, and is this the right program for everyone?

Basically, an ARM is a mortgage loan with an interest rate that adjusts over the life of the loan. The interest rate is tied to the national interest rates – as interest rates increase on a national level, the interest rate on the ARM may increase as well.

Most ARMs have an introductory period with a fixed interest rate. This period is often 2, 3 or 5 years. During the introductory period, the interest rate on a loan is quite low and payments remain the same. After the introductory period, the interest rate could drop or increase, depending on what is happening to the national interest rate.

As you can imagine, an ARM is not for everyone. This loan has a high degree of risk. You are essentially gambling that interest rates will remain low after the introductory period is over. If they do not, your mortgage payment can skyrocket. Of course, if the interest rate stays low, the mortgage payment holds fairly low. And many home buyers plan to refinance before the loan ever passes the introductory period.

Why do people take out ARMs? Initial interest rates can be so low that home owners are basically paying the principal of the loan (rates could be between 1 and 3%). While this looks like a great option, if interest rates suddenly change, or home owners wait too long to refinance, they can find themselves with a rapidly escalating home payment. And if they do refinance, they may not be able to afford a loan at the new interest rate. Some home buyers are forced to sell their home, just to get out of the loan.

It's important to consider all the options when investigating home mortgage programs. There are options for just about everyone, but it's equally important to understand the risk associated with each program. You want a mortgage that you can live with for years to come.

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Source by Steve Essington

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